Does the U.S. Realize It's in Competition?
Globalization these days is not just about inexpensive manufacturing. It includes virtually all aspects of industry, and the really smart companies are taking each component of their businesses and executing it in that part of the world that has competitive talent at competitive wage rates.
Historically, what has been the core competency of the U.S. that has driven its success? It's innovation. We invented the automobile industry, the steel industry, chemicals, materials, pharmaceuticals, information technology and most recently, the biotechnology industry. When these major innovations occur, product development and manufacturing typically take place in the United States for a period of time. As the industry becomes more mature, globalization takes over and various tasks move out to various parts of the world that can perform them most effectively and efficiently. This cycle has happened over and over again.
Hence, the most important task of the United States is to protect and strengthen its ability to innovate. That is what has driven our economy in the past and will likely drive it in the future. Unfortunately, U.S. innovation now faces three major risks, as other countries become more competitive.
First, we face a talent disadvantage. Recently, when I was the chair of the education committee of the President's Council of Advisors on Science and Technology, I learned that more than 80 percent of emerging technical talent is being developed in Asia. In fact, China and India have more honor students than we have students. Most importantly, our K-12 public education system has been broken for two decades, and the primary issue is weak teachers. Fifty-six percent of public high school physical science students are taught by "out of field" teachers, who never even minored in science. Chances are slim a student can be enticed into a science or engineering career by such a teacher. Teachers should be given performance appraisals, and each year the weakest should be terminated, but that concept is banned by the teachers unions, and politicians won't deal with it. Today K-12 public education in America is drowning in mediocrity because of the protection of weak teachers, which drives out strong teachers.
The second risk relates to driving multinational corporations out of America. Today in Washington, D.C., there is little understanding of how multinational corporations work. For example, even though the United States has the second highest corporate tax rate in the world (35 percent), the U.S. government is considering taxing a multinational company's foreign profits even when they don't bring those profits back to the U.S. More than 20 multinational companies have already decided to reincorporate outside of the U.S., to countries such as Switzerland, Ireland and Singapore, just in case that threat becomes law. Examples are Accenture and Tyco.
I am on the audit committee of the board of directors of a major U.S.-based multinational, and we are evaluating a move to Switzerland or Singapore. As a board member, I am legally bound to be aggressive on tax issues for shareholders. Reincorporating outside the U.S. causes major losses in jobs and the risk of moving innovation to other countries. The U.S. government needs to overhaul corporate taxes and get competitive.
The third area where the U.S. is falling behind is research and development. In the 1970s, 6 percent of the U.S. government budget funded R&D. Now it's 1.7 percent. Additionally, other countries are recruiting our top R&D talent. Governments of Singapore, China and others are very aggressive at recruiting our top technical talent. For example, China has opened up the world's largest nanotechnology center and is going around the world luring world-class nanotechnology experts by offering 10-year, $100 million grants. When two prize scientists at the U.S. National Institute of Health were recruited away to the Genome Institutes of Singapore, they commented, "We wanted to be in a place where they are excited by science." We need to take tens of billions from the ineffective Department of Education, which has a budget of $63 billion in discretionary funds, and fund key technologies.
It is very clear that the U.S. is getting beat by some very aggressive competitors. Unfortunately, our government officials do not even seem to realize that we are in competition.
Robert J. Herbold (GRS '66, Mathmatics; '68, Computer Science) is a former executive vice president and chief operating officer of Microsoft Corp. Prior to his role at Mircosoft, Herbold spent 26 years at Procter & Gamble, including the last five as senior vice president of marketing. He is currently an operating partner of the private equity firm Thoma Bravo LLC and the managing director of The Herbold Group LLC, a consulting business focused on profitability.
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